Oil Majors Eye Strategy to Scale Up Renewables

Recent deals by Repsol, BP and Total focused on the renewable project pipelines of US project developers flew somewhat under the radar, but could prove instrumental in building the scale necessary to reach their energy transition targets. While the investments are not guaranteed, they also provide a blueprint for their US footprint in years to come, and others might pursue a similar model. Repsol announced in May that it would take a 40% stake in project developer Hecate Energy. BP recently stepped up its US presence with a deal for the 9 gigawatt project pipeline of US player 7X Energy, and Total also inked a similar, if smaller, US deal in February (NE Feb.11'21). Pipeline Prospects Entering projects early, in the pipeline stage, could allow companies a leg up on economics, allowing them to farm down assets and boost returns. Later entries -- likely coming at a hefty price tag -- make project economics even slimmer. That may be compelling as top oil players have faced scrutiny over whether their returns expectations from renewables are too optimistic, with Equinor recently lowering its target to 4%-8% from 6%-10% (EIF Jun.16'21). With the latest renewables deals, BP is targeting returns of 8%-10%. Repsol believes its projects, in the end, can produce a double-digit equity internal rate of return. Expertise via project development specialists could help teething troubles as the companies aim to scale up in the US. European majors have touted their project management expertise as an asset in new sectors. But the companies could still confront execution risk as they aim to go big in an industry distinct from their historical core oil business. BP BP’s $220 million acquisition of the 7X projects represents about 9 GW of utility-scale solar projects, equivalent to 64% of the company’s current pipeline. The UK major is no stranger to the pipeline approach. Since individual solar projects tend to be relatively small -- in the 100 megawatt to 200 MW range -- this strategy lets companies target a range of them all at once, allowing them to subsequently scale up. The company’s 50-50 solar joint venture (JV), Lightsource BP, already working on a range of US projects and set to develop its new ones, is adapting a similar approach it has used in Europe. The moves aim to help BP expand renewable electricity generating capacity from 2.5 GW in 2019 to 50 GW by 2030. Repsol Chicago-based Hecate, in which Repsol bought a 40% stake, has a portfolio of more than 40 GW of projects under development. For Repsol, the US brings a strong opportunity in its size and growth potential -- as well as low costs, a strong resource and stable regulatory environment -- Joao Costeira, director of renewables for Repsol's electricity and gas unit, recently told Energy Intelligence (NE Jun.17'21). US solar is a sector poised for rapid growth, with developers adding almost 12 GW of capacity across the entire US last year, according to the Energy Information Administration. Another 15.4 GW is expected in 2021. Total Total, also in February, penned a more modest but similar deal with developer SunChase Power and Map RE/ES for a pipeline of 2.2 GW of solar projects, and 600 MW of battery storage assets, all of which are in Texas. That deal brings the French major to developing 4 GW of renewable capacity in the US, contributing to its objective to reach 35 GW of renewable capacity by 2025 and 85 GW by 2030 and well over 250 GW by 2050. Peer Approaches Other European majors have also ventured into the US to help fulfill their renewable power targets. But they have taken a range of approaches, including in offshore wind, which tends to see larger individual projects developed in phases. Equinor has penned deals to provide 3.3 GW of power to New York state via the Empire Wind 1 and 2 projects, as well as Beacon Wind 1 (EIF Apr.21'21). BP last year inked a $1.1 billion deal for a 50% share in a pair of those projects. Royal Dutch Shell also has a 50% share in two offshore wind projects under development, some 1.6 GW at Mayflower Wind off Nantucket/Martha’s Vineyard and 2.5 GW at Atlantic Shores off New Jersey. Shell is developing solar through its Silicon Ranch unit, with an operating capacity of about 1.1 GW. It is also focusing on energy distribution and helping customers offset their emissions, such as a partnership with GM that offers Texas customers a renewables plan that provides free electric vehicle charging. Italy's Eni, for its part, teamed up with Falck Renewables in 2019 for a JV to develop onshore wind and storage projects. The JV is already present in five states and is targeting capacity of 1 GW by 2023. US majors Exxon Mobil and Chevron have remained largely uninterested in large-scale renewable power investments in their home country, unimpressed by the returns and doubtful of whether they can bring unique value, although Chevron has dipped its toe in the sector via a modest venture capital investment. Kathrine Schmidt, Houston A version of this story first ran in sister publication EI Finance. Recent US Renewables Project Pipeline Deals by Euro Majors Operator Developer Size BP 7X 9 GW pipeline Repsol Hecate Stake of 40% in developer with